Conversion Process Overview

Definition and Scope

The conversion process is the set of activities that transforms raw materials into finished goods. This process requires more detailed record-keeping and varies in complexity based on the business type.

Typical Activities in the Conversion Process

• Maintaining inventories of raw materials and finished goods.

• Producing finished goods from raw materials by applying direct labor and tracking direct equipment costs.

• Applying overhead costs and managing indirect costs.

• Accounting transactions - These include:

  • Transferring raw materials to work-in-process (WIP).

  • Moving WIP to finished goods inventory.

  • Recording direct labor and overhead costs.

Key Accounting Transactions

The conversion process generates accounting entries that record the transfer of resources and costs. For example:

• Transfer of raw materials into WIP.

• Allocation of direct labor and manufacturing overhead to WIP.

• Final movement of completed goods into finished goods inventory .

These activities aim to ensure the accurate tracking of costs throughout the production lifecycle and align inventory management with demand forecasts. The process also emphasizes using internal controls like authorization procedures and segregation of duties to maintain the integrity of operations and financial reporting.